Sula Vineyards Ltd Management Discussions

1. Economic Scenario / Economy Overview Global economy

The global economy remains remarkably resilient, with growth holding steady as inflation returns to target. The reported year witnessed various headwinds including volatile commodity prices, persistent geopolitical conflicts and calibrated interest rate hikes dampening economic activity and resulting in the decline in global growth from 3.5% in CY22 to 3.2% in CY23. The year has been eventful, starting with supply-chain disruptions in the aftermath of the pandemic, a Russian-initiated war on Ukraine that triggered a global energy and food crisis, and a considerable surge in inflation, followed by a globally synchronized monetary policy tightening.

As global inflation descended from its peak, economic activity grew steadily, defying warnings of stagflation and global recession.

Markets reacted exuberantly to the prospect of central banks exiting from tight monetary policy. Financial conditions eased, equity valuations soared, capital flows to most emerging market economies excluding China have been buoyant, and some low-income countries and frontier economies regained market access.

On the downside, new price spikes stemming from geopolitical tensions, including those from the war in Ukraine and the conflict in Gaza and Israel, could, along with persistent core inflation where labor markets are still tight, raise interest rate expectations and reduce asset prices.

Source: International Monetary Fund, World Economic Forum

Indian Economy

The global economy is expected to witness a synchronous rebound in 2025 as major election uncertainties are out of the way and central banks in the West likely announce a couple of rate cuts later in 2024. India will likely see improved capital flows boosting private investment and a rebound in exports. Inflation concerns remain, which may ease only in the latter half of the next fiscal year barring any surprises from rising oil or food prices.

The Indian economy has maintained its promising trajectory amidst the global headwinds. In FY24, Indias GDP touched 7.6% with its Current Account Deficit (CAD) standing at 1.9% of GDP

Key trends in Indias economic growth:

Demographic Dividend -

Demographics are one of Indias key assets. Now the worlds most populous country, India has a median

age below 30, while in the US and China this metric is closer to 40. Not only does this deliver around 1.5 to 2 cr legal drinking age (LDA) prospects per year

(source: UN World Population Prospects), but also means that the

working age population is expanding, absolutely vital to sustaining economic growth. Between 2021 and 2031, the country is expected to add 283m more middle-class consumers (source: ICE 360 data).

Indias spending share in the luxury and premium goods and services category (such as spending on transport, communication, recreation, etc.) has traditionally been lower than nations such as the United States, China, Japan, and Germany. There is, hence, potential for this ratio to increase further as consumer income grows.

Reinvigorating retail -

Consumer spending in India has been low after the pandemic, and the rebound has been inconsistent as well. One of the biggest reasons has been the prolonged impact of the pandemic across consumer segments, exacerbated by subsequent global uncertainties.

2. Indian Consumer Sector Overview - defining rural and metro growth:

Indias consumption landscape is increasingly leaning towards premium products, even as the mass market experiences slower growth. The premium segment in the consumer goods sector has expanded significantly, outpacing the growth of mass-market goods by over two- and-a-half times in recent quarters. This trend is evident across various regions, including rural areas, where one- third of total sales are now attributed to higher-priced products, reflecting a growing preference for premium options among consumers.

Not only has growth in consumer spending post pandemic been fluctuating, but there is also a shift in consumption patterns, with demand for luxury and high-end products and services growing faster than demand for basic goods. As we expect the number of middle- to high-income households with increasing disposable income to rise, this trend will likely get further amplified, driving overall private consumer expenditure growth.

The shift is also observed in the alcoholic beverages (Alcobev) sector, where premium categories have seen a 10% growth, in stark contrast to a 12.4% decline in volume for mass-priced segments. This divergence in consumer behaviour highlights a broader pattern of income disparity influencing purchasing decisions. Urban centres, benefiting from more stable and higher incomes typically

linked to organised sectors, continue to demonstrate strong consumption demand across various categories, showing resilience against broader economic pressures such as inflation. Conversely, rural markets have noted a decline in demand, influenced by economic factors like inflation and irregular monsoons impacting agricultural productivity and, consequently, disposable incomes.

3. AlcoBev Market Overview and Outlook Global Market

The global alcoholic beverage market is experiencing a period of robust growth, with the market size reaching approximately USD 1.75 trillion in 2023 and projected to expand to around USD 2.34 trillion by 2032, with a 3.20% CAGR from 2024 to 2032. This expansion is driven by several key trends and developments that are shaping the industry.

Key Trends in the Global Alcoholic Beverage Market:

Premiumisation: There is a marked increase in demand for premium spirits and ready-to-drink (RTD) beverages. Consumers are showing a willingness to pay more for alcoholic beverages that are made from high-quality ingredients and offer unique and refined tastes. This trend is expected to see double- digit growth as the appeal for luxury experiences continues to rise.

Innovative Flavours: The market is witnessing a surge in the launch of unique flavours, catering to a consumer base eager for new and diverse taste experiences. This trend includes the introduction of various flavoured spirits and alcoholic beverages that provide novel consumption experiences.

Health-Conscious Choices: With growing health consciousness among consumers, there is an increasing demand for low-alcohol or alcohol-free alternatives. This segment is expanding as more consumers opt for healthier lifestyle choices without foregoing social drinking experiences.

E-commerce Growth: The rise of e-commerce platforms has significantly enhanced the accessibility of alcoholic beverages, making it easier for consumers to explore and purchase a wide range of products from the comfort of their homes.

(Sources: Fortune Business Insights, Statista, World Bank,

Trading Economics)

4. India AlcoBev Market Overview and Outlook Indian Outlook

Globally, India is set to become the fifth-largest contributor to the AlcoBev markets revenues in the near to medium term. This growth is part of a broader trend where emerging markets are increasingly influencing global economic dynamics. The Indian AlcoBev sector not only underscores the countrys growing influence in global markets but also highlights the economic opportunities that arise from its internal market dynamics and demographic advantages.

Indias Alcobev industry is projected to experience significant growth, touching a market size of USD 64 billion by 2030, from USD 52.4 billion in 2021, representing an annual increase of 6.54% between 2023 and 2027. The market is set to grow from an estimated size of approximately USD 55 billion in 2024 to around USD 112 billion by 2034, with a 7.2% CAGR. This growth trajectory is underpinned by demographic trends, evolving consumer lifestyles, and a shift in cultural perceptions regarding alcohol consumption.

In India, per capita alcohol consumption is projected to increase gradually, with an estimated rise of 0.1 litres (a 2% increase) between 2024 and 2029. By 2029, the per capita consumption is expected to reach a new peak of 5.06 litres.

Several factors are driving this growth, including rising incomes, urbanisation, increased access to alcoholic products, and a trend towards premiumisation. Younger consumers are also contributing to the expansion of the market. The growth is further supported by demographic shifts, an expanding middle class, and government policies that are increasingly favourable to the sector.

The sector, a substantial part of the nations economy, accounts for about 2% of the countrys nominal GDP while playing a crucial role in employment, supporting over 80 lakh jobs both directly and indirectly. These positions are spread across various related sectors, including agriculture, food and beverages, retail, and hospitality. Additionally, the AlcoBev industry contributes significantly to state revenues, with indirect taxes amounting to Rs 2.4 lakh crore in FY 2021, and customs duties on alcoholic beverages alone bringing in Rs 2,400 crore.

Competitive Dynamics

The Indian alcohol market is characterised by intense competition. Companies are continually innovating in product offerings, marketing strategies, and distribution methods to capture and expand their market share. Strategies include diversifying product lines to include low-alcohol and alcohol-free options, enhancing online sales capabilities, and implementing eco-friendly production techniques.

Outlook and Opportunities

The next decade will likely see sustained growth driven by:

Increasing Disposable Income: With rising

disposable incomes, more consumers are likely to indulge in premium and luxury alcohol products.

Premiumisation: There is a noticeable consumer pivot towards premium labels. This shift is not only a sign of rising income levels but also of growing sophistication in palate.

Expanding Craft and Boutique Alcohol Sector:

Small-scale, boutique alcohol producers and a growing interest in artisanal products are set to shape market trends.

Development in Wine and Beer Tourism: The potential in Vini tourism and craft beer experiences presents new avenues for growth and diversification.

(Source: Future Market Insights, The Economic Times, ISWAI Report) (Source: News Reports, The Economic Times)

5. Wine Industry Overview Global Wine Outlook

The global wine industry is poised for significant transformation and growth amidst several challenges and emerging trends. The market size was valued at USD 483.6 billion in 2023 and is projected to expand to USD 762.3 billion by 2032, growing at a CAGR of 5.08% from 2024 to 2032.

Growth Opportunities:

The Asia Pacific region, particularly developing economies such as Thailand, Malaysia, Vietnam, the Philippines, and Indonesia, is becoming increasingly attractive due to expanding consumption and a strong preference for premium imports. These markets are capitalising on the global trend towards premiumisation and the introduction of innovative wine products, positioning themselves as significant growth areas for the industry.

Volume Forecasts:

The global wine markets volume is expected to amount to 25.3 billion litres in 2024, with 19.4 billion litres consumed at home and 5.9 billion litres out-of-home, reflecting a shifting dynamic where home consumption continues to dominate.

(Sources: Statista, Expert Market Research, IWSR, IMARC, Vinetur)

Indian Wine Outlook

The wine market in India is poised for substantial growth, driven by several advantageous factors. In 2024, the market is expected to generate combined revenues of USD 9.3 billion, with USD 7 billion from at-home purchases (e.g., supermarkets and convenience stores) and around USD 2.2 billion from out-of-home venues (e.g., restaurants and bars).

<p >The key growth drivers of the wine segment remain fairly constant

• Aspirational:

Propelled by a burgeoning appreciation for wine among urban, middle-class consumers, were witnessing a significant shift. Wine is no longer just a beverage, its become a symbol of sophistication and aspiration.

• Favourable demographics:

Indias wine industry enjoys a powerful tailwind thanks to its favorable demographic profile. The nation boasts a expanding middle class thats not only growing in size but also increasingly open to new experiences and experimentation. This isnt just about disposable income; Indias young population is a significant factor. Unlike previous generations, theyre more receptive to trying new things, including exploring a wider variety of beverages like wine. This presents a highly promising opportunity for wine companies to tap into this dynamic and rapidly growing market segment.

• Women and Alcohol:

The changing drinking habits of women in India have become a significant factor driving increased alcohol consumption. As societal norms evolve and women gain greater empowerment, they are participating more in social and professional settings where drinking is common. This trend can be attributed to factors like increased social acceptance, portrayal of alcohol in media, and stress management, particularly among working women and those in higher income brackets. Additionally, targeted marketing by alcohol brands has played a role in promoting alcohol consumption among women. This shift indicates a changing social landscape and potential growth in the alcohol market.

• Rise of In-Home Consumption:

Post COVID-19, saw a sea of change in consumer behaviour around alcohol consumption, with a shift towards drinking at home. Drinking premium alcoholic beverages at home is comparatively more affordable than drinking in restaurants, resulting in a rise in consumption of premium drinks. Wine, a suitable option for consumption in a family setting, contributing to its increased popularity. The at-home segment is anticipated to grow at a CAGR of 15.76% from 2024 to 2028, reflecting the increasing integration of wine into everyday Indian lifestyles. By 2024, the total volume of wine consumed is projected to reach 822.2 million litres, with 699.8 million litres consumed at home and 122.4 million litres out-of-home. This growth trajectory is set to continue into 2025, with a projected volume growth of 15.4% in the at-home sector.

• Premiumisation:

Fueled by a desire for "affordable luxury" at home, the pandemic accelerated a trend towards premium wines across all categories. Consumers, especially younger demographics, embraced home-mixology and showed a growing interest in high-quality sparkling wines. This premiumization trend is expected to continue, particularly in the bubbly category. The trend toward premiumisation is evident, with a shift in consumer preferences towards high-quality and unique wine experiences, facilitated by rising disposable incomes and a young, increasingly globalised demographic eager to explore different alcoholic beverages.

• Wine Industrial Promotion Scheme:

Several states in India, such as Maharashtra, Karnataka, and Tamil Nadu, have implemented policies to incentivize the production of wine. As a result, the wine industry in these states receives certain benefits, such as a reduction in Excise Duty and simplified licensing procedures. In Maharashtra, for example, the state government introduced the Wine Industry Promotion Subsidy in August 2009 to promote wine production within the state. The subsidy is provided for the sale of wine made from grapes grown within the state, without the addition of alcohol or blending with wine from other vendors. The subsidy takes the form of an 80% refund of the VAT paid on wine sales within the state. Recently, The Maharashtra state government has taken a significant step by reinstating the Wine Industrial Promotion Scheme (WIPS), aimed at revitalizing the wine industry, for a duration of four years till FY28. The decision to revive WIPS aligns to support grape-growing farmers in the state.

The Indian wine markets robust growth is further evidenced by a significant surge in wine imports, emphasising an expanding palate among Indian consumers for finer wines.

This positive outlook is supported by favourable trade agreements, such as those with EFTA and potential agreements with Australia and the UK, which are expected to enhance access to quality wines and stimulate market growth by reducing customs duties.

Moreover, Indias evolving regulatory landscape, improving local production capabilities, and enhanced retail availability position it as a flourishing market with immense potential for both domestic and international wine brands. This potential is recognised globally, with numerous international brands actively seeking to capture this emerging market, viewing India as a key growth driver in the global wine industry landscape.

(Sources: Statista, IWSR, IBEF, The Economic Times, Forbes, Business Standard, Future Market Insights)

Wine Tourism Business

The global wine tourism market is experiencing significant growth, with revenue projected to increase from USD 85 billion in 2023 to USD 292 billion by 2033, with a CAGR of 13.1% over the next decade.

Key Dynamics and Trends

Increasing Popularity and Economic Impact: Wine tourism is not just about wine tasting but encompasses a variety of experiences including winery tours, wine festivals, and educational workshops. This segment significantly contributes to job creation and the economic development of local communities.

Investment in Infrastructure: To accommodate the rising interest in wine tourism, regions are investing in enhancing tourism infrastructure which improves the overall visitor experience. This includes better facilities at vineyards, the development of wine trails, and the establishment of educational centres focusing on wine knowledge and sustainability.

Emerging Markets and Premiumisation: Countries like China, India, and those in Eastern Europe are emerging as significant players due to increasing local consumption and a demand for premium wine experiences. Additionally, there is a growing interest in low-alcohol wines and sustainable practices within the wine industry, aligning with global trends towards health and environmental consciousness.

Future Prospects:

The wine tourism market is poised for continued growth, driven by an expanding global interest in wine as a cultural and experiential good. The integration of sustainability practices and the increasing role of technology in enhancing tourist experiences are expected to further boost the markets expansion.

(Source: Future Market Insights)

6. A Challenging Regulatory Scenario in India

The regulatory landscape for alcoholic beverages in India is shaped by a combination of national and state- level policies. Recent reforms aim to enhance retail experiences, optimise taxation, and improve labelling standards, among others.

AlcoBev falls under the purview of Food Safety and Standards Authority of India (FSSAI). Additionally, the sector has strict direct advertising rules which makes the marketing of the product difficult, even though the sector provides a major source of revenue to states, only next to petroleum products.

• Retail reviving:

a. Evolving Excise Policies:

Indias excise policies are gradually evolving to encourage retail development. Retail outlets, particularly in Haryana, are increasingly adopting modern, well-lit designs and convenient locations, offering extended operational hours and enhanced customer service.

b. Enhanced Buying Experience:

Attractive retail outlets foster a positive consumer experience, attracting a growing customer base and boosting revenue for both license-holders and the state. For instance, Uttar Pradesh has permitted premium alcohol outlets in shopping malls, and Gujarat allows alcohol sales in GIFT City, a signature development. This measured approach helps mitigate potential backlash against abrupt changes.

• Regulatory Changes:

a. Complex Regulatory Landscape:

Alcoholic beverage regulations are diverse and complex in India. High tariffs, customs duties, licensing fees, and varying state taxation levels pose significant entry barriers for both local and imported products.

b. State Bureaucracy:

Building a business in India is often slowed by varied state-level bureaucratic challenges, necessitating a consolidated approach within one state before expanding to others. However, potential Free Trade Agreements (FTAs) with the EU and the UK promise to ease these barriers.

Positive Impact of Tax Reforms:

In Maharashtra, recent reductions in excise rates have shown a positive impact on sales volumes, suggesting that lowering taxes can benefit imports, promote domestic premiumisation, and increase state revenue.

The industry needs a regulatory overhaul and an inflation- embedded approach to pricing. This would take into consideration several factors such as differences in operating conditions between states, such as state levies, cost of materials, transportation, etc. Regular consultations with industry stakeholders are essential to forge a predictable and progressive policy framework, incentivizing higher investments in the sector.

(Sources: Digicomply, IWSR)

7. Sustainability at Sula Vineyards

Sustainability is the core of our ethos at Sula; its not just a practice but a way of life and a foundational principle in our business. Our journey towards sustainability started over a decade ago, setting a precedent long before it became a mainstream pursuit. We strive to enhance our land and enrich the lives of the community dependent on our businesses through our sustainable vineyards.

We are one of the most eco-friendly companies in India, with a significant amount of our resources committed to sustainable winemaking practices, sustainable vineyards and ensuring fair livelihoods for our community of farmers across Maharashtra and Karnataka.

As part of our commitment to delivering the best quality of wines, our food safety system is now certified by the Brand Reputation Compliance (BRC) Global Standards. This certification is an upgrade on our earlier ISO 22000 certification. BRC standards are dynamic and evolve rapidly to reflect global best practices, are industry specific and are also recognized by the Global Food Safety Initiative (GFSI). Our two largest facilities are now BRC certified, and the others will also be adopting BRC standards going forward.

At Sula, our waste management practices follow a scientific approach that prioritizes the principles of Reduce, Reuse, and Recycle. A significant portion of our waste consists of organic matter, which we convert into organic compost to nourish our vineyards. Despite 99% of our packaging materials being recyclable, we are committed to further enhancing our sustainability efforts by implementing a comprehensive packaging program.

We have made significant strides in enhancing our operational efficiencies. Our efforts have resulted in a notable reduction in water usage, decreasing from 71.5 liters per 9-liter case in FY20 to 52.8 liters. Our aim is to further reduce this to 40 liters. Additionally, our reliance on solar energy has seen a commendable improvement, increasing from 49% in FY20 to 59% in FY24. Looking ahead, we aspire to elevate this to 70% in the long term. Its worth noting that energy accounts for a substantial portion of our manufacturing costs. These advancements will enable us to effectively lower this expenditure, thereby contributing positively to our profitability.

We are pleased to announce that we have become the first winery in Asia to be awarded the Gold Membership of the International Wineries for Climate Action (IWCA), recognizing our achievement in meeting the highest carbon emission reduction standards in the wine industry.